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Good morning. My name is Mary, and I'll be your conference facilitator today. Welcome to the Frontera Energy's Second Quarter 2021 Operating and Financial Results Conference Call. [Operator Instructions] This call is scheduled for 60 minutes. I would like to remind you that this conference call is being recorded today and is also available through audio webcast on the company's website. [Operator Instructions] Analysts and investors are reminded that any additional questions can be directed to the company at ir@fronteraenergy.ca. This call contains forward-looking statements which reflect the current expectations or beliefs of the company based on information currently available. Forward-looking statements are subject to a number of risks and uncertainties that may cause the actual results of the company to differ materially from those discussed in the forward-looking statements. Certain material assumptions were applied in formulating such forward-looking statements. These assumptions and factors could cause actual results or events to differ materially from current expectations as disclosed in the company's Q2 MD&A released August 11, 2021, under the heading Risks and Uncertainties and under the heading Risk Factors and elsewhere in the company's annual information form dated March 3, 2021. Any forward-looking statement speaks only of the date on which it is made, and the company disclaims any intent or obligation to update any forward-looking statements. I would now like to turn the call over to Mr. Gabriel de Alba, Chairman of the Board of Frontera Energy.
Thank you, Mary, and thank you, everyone, for joining today's conference call to review Frontera's second quarter operating and financial results. Joining me on the call today are Orlando Cabrales, Frontera's Chief Executive Officer; Alejandro Pineros, Frontera's Chief Financial Officer. Also available to answer questions at the end of the call, we have Duncan Nightingale, VP Field Development, Reservoir Management, Reserves and Exploration; Ivana Arevalo, VP Operations; and Regan Palsgrove, Head of Exploration. In March of this year, Frontera announced the following key 5 priorities: number one, delivering value-focused production, cash flow and reserves from the company's Colombian operations. Two, advancing the company's exciting exploration and development portfolio in Colombia and exploration opportunities in Ecuador and Guyana. Three, achieving continuous operational improvements and greater cost efficiencies across the business. Number four, maintaining a strong balance sheet and executing our hedging program to support Frontera's near and long-term capital program. And number five, continuing to enhance shareholder returns, including through the NCIB for the purchase of -- up to approximately 5.2 million of our common shares. In the second quarter of 2021, Frontera continued to make significant progress on these fronts. We actively work with our stakeholders in Colombia to find solutions to support long-term production on our valuable Quifa block. We secured an acreage extension to the CPE-6 block. Through our joint venture with CGX, Frontera prepared to spud the Kawa-1 well in the coming days in the Corentyne block in offshore Guyana. I believe that the Kawa-1 well is one of the most exciting exploration wells in the world, with a potential discovery serving as a key value creation catalyst for Frontera. We strengthened our balance sheet and cash flow profile by refinancing our bonds at a lower interest rate while extending the maturity to 2028 and to significant investor demand, increased the size of the bond to $400 million. The company also reduced its restricted cash position by $33 million compared to Q1. We bought back 1.5 million shares under the NCIB. Importantly, we released the 2020 sustainability report and ESG goals, highlighting the progress the company has made over the last year to act consistently and transparently to offer quality employment, to promote a sustainable supply chain, to contribute to the sustainable development of communities and to work in harmony with the environment. I'll now turn the call to Orlando Cabrales, Frontera's CEO; and our CFO, Alejandro Pineros, who will share their views on our second quarter. We will then return to you for some final comments.
Thank you, Gabriel.
Thank you, Orlando.
Thank you. Thank you, and good morning, everyone. The second quarter was a very busy quarter, and I believe ultimately positive for the long trajectory of the company despite the external factors that temporarily impacted our production. Production in the second quarter averaged 35,682 BOE per day, down approximately 12% compared with 40,599 BOE per day in the prior quarter. The reduction in production quarter-over-quarter was mainly due to the following reasons: temporarily reduced water disposal volumes and community concerns which delayed drilling a new injector well at Quifa and a slower-than-anticipated recovery of full production levels at CPE-6 following the lifting of road blockades. These community concerns have now been resolved. As a result, on July 16, 2021, Frontera announced that it now expects average daily production of 37,500 to 39,500 BOE per day for the year compared to its previously announced guidance range of 40,500 to 42,500 BOE per day. The company now anticipates a year-end exit rate of over 40,000 BOE per day compared to the approximately 43,000 BOE per day that the company previously announced. I will discuss our actions and planning in Colombia further in a moment. Despite the revised production guidance, strong Brent prices and the company's focus on cost efficiencies allow Frontera to increase its annual operating EBITDA guidance by 17%, at the midpoint to $325 million to $375 million from $275 million to $325 million. And the company narrowed its total capital expenditure range to $245 million to $295 million, reflecting the expected cost of the Kawa-1 exploration well offshore Guyana as the company continues to evaluate its multiple strategic options for this valuable opportunity. Frontera's operating EBITDA increased by 23% to $84.8 million. And the company improved its operating netback by 12.7% to $32.83 per BOE compared to the first quarter of this year despite temporary setbacks in production volumes. We also increased cash provided by operating activities by 84% to $87.4 million compared to the first quarter. As of August 10, 5 rigs were active across Frontera's operations. Let me spend a few moments discussing the potentially transformational Kawa-1 well in offshore Guyana. We are thrilled that Kawa-1 will begin drilling shortly. Frontera, a majority-owned subsurity and co-venture CGX, joint venture partners in the Petroleum Prospecting Licenses for the Corentyne and Demerara blocks offshore Guyana, intend to spud the Kawa-1 well in Corentyne by the end of August this year. The Maersk Discoverer drilling rig is currently on route from Trinidad and is expected at the Kawa-1 location on August 15. The joint venture expects that Kawa-1 well will reach total depth in approximately 85 days after the spud date. The Kawa-1 well is located in the northeast quadrant of the Corentyne block, approximately 200 kilometers offshore from Georgetown. The water depth is approximately 355 meters and expected total depth of the Kawa-1 well is 6,685 meters. The primary target of the Kawa-1 well is a light oil, large Santonian slope fund complex with an overlying Campanian fan. The Kawa-1 well will also penetrate secondary objectives in a shallower Campanian sand and a deeper Santonian sand, which the joint venture believe has additional hydrocarbon potential. The stack primary and secondary Kawa-1 targets are considered analogous to the discoveries immediately adjacent to the Corentyne block in Block 58 in Suriname. Proximity of the Corentyne block to the Cretaceous Berbice Canyon sediment source is interpreted to have concentrated sandstone reservoirs in the North Corentyne area. The joint venture has assembled a highly qualified and experienced team for the drilling campaign, with extensive deepwater drilling expertise from operations around the globe, including the Guyana Basin. Now I would like to discuss our Colombian operations. In Colombia, Frontera currently has 3 drilling rigs and 2 workover rigs active at Quifa, CPE-6 and Coralillo. In the second quarter of 2021, the company drilled 12 wells and complete well services on 23 others. At Quifa, reserves have been unaffected by the temporary reduction in water disposal volumes as the company develops other water disposal options for the benefit of long-term production, including, as I said previously, drilling a new injector well on the block. The company expects that once the new injector well is operational, Quifa production will increase. Frontera expects to drill 10 development wells at Quifa in the second half of 2021. At CPE-6, production has returned to the pre-shut-in levels of approximately 3,600 BOE per day. The company continues to expect increased production at CPE-6 by approximately 40% by the end of the year compared to 2020 through continued drilling and construction of additional water handling facilities. During the quarter, the ANH agreed to extend the CPE-6 boundary area by approximately 116,000 net acres to the north of the current CPE-6 boundary area, bringing the company's total acreage position to approximately 646,000 net acres. The boundary extension provides the company with additional near-field exploration and growth opportunities adjacent to our CPE-6 facilities. On the VIM-1 Block, the joint venture is accelerating development for La Belleza discovery drilled in 2019, including the production of compressed natural gas. Subject to timing, partner and regulatory approval, the joint venture anticipates preliminary production of approximately 7 million cubic feet per day plus liquids for a total equivalent production of 2,700 BOE per day gross in 4Q of this year. The Basilea-1 well was drilled to a total depth of 10,864 feet, encountering gas shows through the shallower Porquero Formation and has now been temporarily suspended. The drill rig has been moved to the Planadas-1 location, approximately 7 kilometers west of La Belleza discovery. The Planadas-1 exploration well was a spud on June 30 and is targeting Cienaga de Oro limestones. I would now like to turn the call over to Alejandro Pineros, our CFO, who will take you through our Q2 2021 financial and operational results. Alejandro?
Thank you, Orlando. Cash provided by operating activities was $87.4 million in the second quarter, up 84% from $47.4 million in the prior quarter. Operating EBITDA was $84.8 million, up 23% compared to the prior quarter as the company benefited from attractive commercial differentials and higher oil prices during the quarter. Frontera's second quarter operating netback was $32.83 BOE, up 12.7% compared with $29.13 per BOE in the prior quarter. The company recorded a net loss of $25.6 million compared with the net loss of $14.1 million in the prior quarter. The net loss in the current quarter included a nonrecurring expense of $29.1 million related to the debt extinguishment costs, total income tax expense of $37.9 million and a total loss on risk management contracts of $17.4 million, partially offset by $65.6 million of income from operations. Capital expenditures were $61.2 million in the second quarter of 2021 compared with $14.4 million in the prior quarter. The increase in capital expenditures in the second quarter was primarily due to the increased drilling activity as the company drilled 12 development wells at CPE-6, Quifa and La Creciente and increased exploration activity in Guyana and Colombia. Production costs averaged $12.08 per BOE compared with $10.54 per BOE in the prior quarter. The increase in production costs on a per barrel basis in the second quarter is mainly due to the reduced production volumes. Transportation costs averaged $10.84 per BOE compared with $10.89 per BOE in the prior quarter. The company recorded a realized loss on risk management contracts of $24.9 million in the second quarter of 2021 compared to a realized loss of $11 million in the first quarter of 2021. The realized loss is due primarily to the cash settlement on 3-way and put spread contracts paid during the 3 and 6 months ended June 30, 2021, at an average price of $69.01 per barrel. In the second quarter of 2021, the company increased its hedge position from 40% to 60% for the remainder of 2021 using $60 per barrel naked puts. This company's second half hedges do not materially cap upside price potential. The company's total cash position was $486.6 million at June 30, 2021, including $63.4 million of the 2023 bond balance, fully paid on July 7, 2021, and $128.3 million of restricted cash. On June 21, 2021, Frontera issued $400 million in 2028 unsecured notes. The 2028 unsecured notes bear interest at a rate of 7.875% per year. Concurrent with the offerings, the net proceeds of the 2028 unsecured notes were partially used to repurchase at a premium and including accrued interest, the total obligation on the company's previously issued 2023 unsecured note. Frontera received tenders and consents from holders of $287.8 million or 82.24% of the aggregate principal amount of its 2023 unsecured notes. The notes tendered prior to the early tender date were settled on June 21, 2021, and the notes tendered after the early tender date and prior to the expiration time were settled on July 7, 2021. On July 7, 2021, the company redeemed all of the remaining 2023 unsecured notes. The company's long-term borrowing of $350 million of 2023 unsecured notes was completely discharged on July 7, 2021. As of June 30, 2021, the company had issued letters of credits and guarantees for exploration, operational and transportation commitments totaling $72.7 million with cash collateral of $14.3 million. At the end of the second quarter, Frontera's restricted cash position was $128.3 million, a decrease of approximately $33 million compared to $161.2 million in the first quarter of 2021. Frontera anticipates releasing additional restricted cash in the third quarter of 2021 as the company continues to optimize its credit lines. Under the company's current normal course issuer bid program, the company repurchased for cancellation 1,525,500 of its common shares during the quarter at a cost of $8 million. As of August 9, 2021, the company has repurchased for cancellation a total of 2,225,500 of common shares at a cost of $11.8 million with an additional 2,972,112 common shares available for repurchase under the NCIB. I would like -- I would now like to turn the call back over to our CEO. Orlando?
Thank you, Alejandro. You have heard Frontera continues to make progress against its priorities in the second quarter. Frontera has a proven and diverse asset base with longevity that generates value-focused production and cash flow from our -- across the portfolio. The company has an advantaged transportation and logistic structure, which provides optionality, increases reliability and maximizes realized price. The company is also resolving its largest contingency liabilities pending final approvals. It is a strengthening its already strong balance sheet by lowering abandonment cost, refinancing debt, securing additional LCs and unrestricted cash. And the company is developing a strong and integrated ESG platform that guides operations and is improving the company's ethical performance and reputation. Looking ahead, I'm excited about the advances the company is making to realize its substantial exploration opportunities. Through its minority-owned subsidiary and joint venture with CGX Energy, Frontera will export the potentially transformational Kawa-1 exploration well offshore Guyana in the coming days. Through its joint venture partnership with Parex Resources in Colombia, Frontera continues to execute its 2-well exploration program at VIM-1 to develop this exciting greenfield opportunity. The joint venture is also accelerating the development of La Belleza discovery drilled in 2019, including the production of compressed natural gas. Frontera will also continue to develop and grow production at CPE-6 in the second half of this year. The company will continue to focus on cost reduction, margin improvements and efficiency to maintain its financial flexibility and its conservative capital structure while maximizing shareholder value. Thank you, Gabriel and Alejandro, and thank you, everyone, for attending our call. I will now turn the call back to our operator, who will open the call up for questions, if any. Thank you.
[Operator Instructions] We can take our first question now from [ Mario Alba ] of [indiscernible]
My first question is if you could elaborate a little bit more on your contingent liabilities in terms of the progress being made there for -- in particular, the one related to the pipeline, that how close are you to actually resolving that? Any timing or details on that? And my second question after that -- well, I'll wait for the first one, then ask the second one.
Mario, thank you, thank you for the question. This is Orlando. Yes, as you know, a settlement was reached with Ecopetrol and send it back in November last year. That is subject to our regulatory approval from the Attorney General Office and also the approval from the Tribunal in Bogota. So the first one is already completed, which is the one granted by the Attorney General Office in Colombia, that was a very important one. We are pending on the second approval. There is nothing to report at this point in time. We hope we can have that by September of this year, but nothing to report at this point in time, nothing else to report.
And I guess, and a follow-up as that, have you had any conversations with Ecopetrol about maybe connecting the board and transporting with the pipeline? Any progress on that potential idea given -- or have you noticed that there's a difference in the relationship with Ecopetrol, given that you have agreed already on this -- you have this conflict past behind you?
Well, I think that the first part of the answer is, yes, I think there is a change the relationship with Ecopetrol due to the settlement of this very large dispute. The second thing I can say is that the communication with Ecopetrol and the business with -- the relationship with Ecopetrol is very good. We have a permanent regular communication at different levels. I cannot say any more than that. I think we are progressing the conversation, including the potential connection to the port, but I would be happy to share with the market as soon as we have something more concrete. But at this point in time, we don't have anything else to say.
And I guess in terms of the second topic and the second question would be on the Guyana project, are you considering partnering with anyone on the block? Is -- would you do a partnership before you find out the results of the exploration or after -- or what are your thoughts about bringing in someone with them because it can be a very large investment, the whole -- developing the whole?
Yes, Mario. It is -- I mean, it could be a large investment. And the only thing that we can say now is that, as we mentioned, we are very close to spud the Kawa-1 well. We are very excited about it. It could be a transformational opportunity for the joint venture, CGX and Frontera. And as we move forward, we will continue to explore different strategic options to continue with the program in offshore Guyana. I am afraid that's the only thing I can say at this point in time.
Okay. And if I may, one last question, that in terms of the ongoing CapEx going forward. If you went a few years back, it was -- maintaining the production for the field that you have was a very CapEx-intensive process. Could you just talk a little bit about how has that changed or not? And what do you think is your CapEx level needed to maintain the current level of production in Colombia versus what it was? And how has that changed and why that has changed?
Mario, yes, as Gabriel said, one of the pillars of our strategy is to focus on value over volumes, value over production and be very, very efficient in terms of our costs, controlling our cost and very efficient in terms of the use of CapEx. So we are focusing on the sweet spots of our existing fields, not only in Quifa but in the other fields. So the level of CapEx that you see this year is different from the ones in previous years. And we believe that with the developing CapEx that we have today, which is around $130 million for our existing fields, not including green -- potential greenfield fields. That is the right level of CapEx to sustain production around 40,000 barrels. We believe that is the right level of CapEx to make our business sustainable going forward.
[Operator Instructions] There are no further questions at this time. Should you have any further questions, please e-mail IR at ir@fronteraenergy.ca. This concludes the call. Thank you all for participating.